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In D.C., Crypto Goes Mainstream


As crypto's popularity has increased, Washington has taken notice.

The first weeks of 2022 have been rough for cryptocurrency holders. Prices have fallen significantly over the last several days, and investors are nervous.


The troubles don’t mean digital currency is going away, though. In fact, crypto is mainstream now. How do we know? Because Washington is paying serious attention of late. What’s more, this matter is the latest issue to divide Republicans and Democrats. It will provide fodder all year and even could be an issue in the 2022 midterm elections.


No fewer than 35 bills were introduced in Congress in 2021 dealing with cryptocurrency and stablecoins. The infrastructure bill that lawmakers approved last fall, and that President Joe Biden signed, requires that crypto asset holders report their holdings to the Internal Revenue Service and mandates cryptocurrency brokers to report digital currency gains to the tax agency. (The industry has pledged to fight the rules in federal court.)


With implications for financial inclusion, privacy and data security, energy consumption, taxation, and national security, federal lawmakers and policymakers are unlikely to let up this year. Let’s start at the beginning, though, because plenty of people still need a primer: what is digital currency and what has everyone so animated?


What Is Cryptocurrency?

Even with the ubiquity of debit cards and digital payments, chances are you still have a little bit of cash in your wallet. While you cannot physically hold a piece of cryptocurrency like you can a dollar bill, it has the same function. You can exchange the currency for a good or service or you can save or invest that dollar and hope it increases in value.


The difference, as NerdWallet explains, is that the cryptocurrency market has no central monetary authority overseeing these exchanges. Anyone can launch a digital coin. In fact, it is estimated that about 16,600 different cryptocurrencies are traded publicly today. The total value of all cryptocurrencies on January 10, 2022, according to NerdWallet, was about $1.9 trillion. That figure was down from about $2.9 trillion late last year.


That dramatic drop alone indicates how volatile crypto can be, which is why you’ve probably been hearing more about stablecoins recently.


As CNet explains, stablecoins are “a subset of cryptocurrencies designed to hold steady — to provide a value that doesn’t fluctuate.” Stablecoins derive their price from the value of another asset. “In short,” CNet says, “a stablecoin is pegged” to something else. For many stablecoins, that asset is the U.S. dollar. Stablecoins also are backed by a central authority that has a reserve of whatever asset that particularly stablecoin is pegged to.


While stablecoins may reduce volatility, like regular cryptocurrency, they are still controversial.


Why Are Some Policymakers So Worried About Crypto?

While many Washington observers were focused last month on the fate of the White House’s Build Back Better (BBB) plan, the U.S. Senate Banking Committee hosted a heated hearing on the implications of digital currencies. A week prior, the U.S. House Financial Services Committee heard testimony from the leaders of some of the country’s top crypto companies. During the deliberations, it became evident to even casual observers that the two parties are as divided on crypto as they are about BBB, or, for that matter, most anything else.


Democrats on these two panels ranged from skeptical about crypto to outright hostile. Senate Banking Committee Chair Sherrod Brown (D-Ohio) even likened stablecoins to “gambling.” House Financial Services Committee Chair Maxine Waters (D-Calif.) said digital currency makes Americans “vulnerable to fraud, manipulation and abuse.” Republicans, in general, were much more hospitable, favoring a light regulatory touch that will allow innovation in the market to develop more organically.


A few months before the hearings, an article published by the Atlantic Council summed up the two sides of the digital currency debate: On one hand, proponents contend “digital currencies could reap the benefits of underpinning the financial system, extend services to the underbanked, and increase the efficiency and security of payments.” Specifically, supporters argue that digital currency will improve financial inclusion in countries like the United States, drive economic growth and better financial outcomes in poorer countries, reduce transaction costs, and fuel entrepreneurship.


Opponents say “these technologies can also be used for state surveillance, to undermine critical financial institutions, and to evade sanctions and law enforcement.” They worry about terrorism, fraud, financial crime, and growing income inequality. As the Council on Foreign Relations has said, policymakers also are worried about the amount of energy it takes to operate the industry. Digital currencies, they said, could seriously hasten climate change.


The 2022 Legislative and Regulatory Landscape

Given Democrats’ concerns about cryptocurrency, the White House has argued for action—even for stablecoins, which, again, are supposed to be a safer option for consumers. As a Bloomberg article explains, in November President Biden’s Working Group on Financial Markets issued a report calling on Congress to pass legislation that would require stablecoin issuers to become banks with insured deposits, capital, and liquidity requirements and Federal Reserve supervision.”


Sen. Brown praised the White House report. He said, “We must work to ensure that any new financial technologies are subject to all of the laws and regulations that protect investors, consumers, and markets, and that they compete on a level playing field with traditional financial institutions.”


Will Congress start its legislative push by focusing on stablecoins? Probably not. More likely, they will start smaller.


As CNBC reporters explain, the House Build Back Better outline includes efforts to address crypto. Specifically, the bill would impose rules that would prevent cryptocurrency investors from immediately buying back the same asset after selling at a loss. There are several pieces of legislation floating around Capitol Hill that, like the infrastructure bill, would enact incremental requirements on the industry and asset holders.


Of course, Democrats also will try to drive forward more comprehensive pieces of legislation that create a strong regulatory regime for crypto. Sen. Brown and Rep. Waters will lead the charge for Democrats, along with Sen. Elizabeth Warren (D-Mass.). Sen. Warren has said, “Right now, our regulators, and frankly our Congress, is an hour late and a dollar short. We need to catch up with where these cryptocurrencies are going.”


Republicans will try to stop the more comprehensive efforts, but they also will offer legislation of their own. The GOP could focus on legislation that would repeal the IRS reporting provisions that were passed as part of last year’s infrastructure legislation. Republican lawmakers also have introduced legislation that would offer rewards for information leading to convictions related to terrorist use of digital currencies and that would beef up tools to help combat money laundering through the use of digital currencies.


Sen. Cynthia Lummis (R-Wyo.), one of the few lawmakers on Capitol Hill who, according to mandatory financial disclosures, is personally invested in crypto, will be a leader on this issue for her party. She has said, “We want the innovators to innovate. We want to create a space where the United States is the leader in opportunity for the creation and use of digital assets.”


The Federal Reserve and federal regulatory agencies also have outlined agendas for crypto for 2022. Last November, the Fed, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency said they will “provide coordinated and timely clarity where appropriate to promote safety and soundness, consumer protection, and compliance with applicable laws and regulations, including anti-money laundering and illicit finance statutes and rules.”


SEC Chair Gary Gensler is particularly eager to take on crypto and stablecoins. He has said, “Right now, we don’t have enough investor protection in crypto. Frankly, at this time, it's more like the Wild West.”


There also will be action at the state level this year. According to the National Council of State Legislatures, 33 states and Puerto Rico have pending crypto legislation from the 2021 legislative session. Seventeen states already have enacted legislation or adopted resolutions.


A Concern: Policymakers’ Lack Of First Hand Knowledge

Democrats and Republicans might be eager to move crypto legislation forward, but one thing could hold them back: a lack of actual first-hand knowledge of the subject. According to Business Insider, only six lawmakers and 21 congressional staff members have disclosed actual investments in digital currency assets. (Under rules approved in 2018, House members have to disclose crypto holdings that total more than $1,000.)


Congress must do its homework, which is why there might be an area where the two parties might be able to agree: the need for more study and fact-finding. House legislation that would create a joint working group between the Commodity Futures Trading Commission and the SEC on digital assets has bipartisan support. So does legislation that would require the Department of the Treasury to submit a report to Congress on the state of cryptocurrency mining around the world.


Crypto is mainstream now, but efforts in Washington to develop a regulatory environment will be a marathon – not a sprint.

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